Tag Archives: HMRC

VAT – Overseas Holiday Lets; a warning

By Marcus Ward 8 February 2016

It is important to understand the VAT consequences of owning property overseas. It may not be commonly known that the UK has the highest VAT threshold in the EC. This means that for many ‘sideline’ businesses such as; the rental of second or holiday properties in the UK, the owners, whether they are; individuals, businesses, or pension schemes, only have to consider VAT if income in relation to the property exceeds £82,000 pa. and this is only likely if a number of properties are owned.

However, other EC Member States have nil thresholds for foreign entrepreneurs meaning that if any rental income is received, VAT registration may be compulsory. Consequently, a property owner that rents out a property abroad will probably have a liability to register for VAT there. Failure to comply with the domestic legislation of the relevant Member State means; payment of back VAT and interest and fines being levied. It is also not a good idea to provoke the interest of overseas tax authorities. VAT registration however, does mean that a property owner can recover input tax on expenditure in connection with the property, eg; agent’s fees, repair and maintenance and other professional costs. Such claims may be restricted if the home is used for own use.

It should be noted that, unlike other types of rental of homes, holiday lettings are always standard-rated. Also, the letting of holiday homes is always treated as a business activity unless lettings are very infrequent. If lettings are a one-off or rare, evidence should be retained to evidence this fact. There is no set number of times a property can be let before it is treated as a business, and the interpretation may differ between different Member States. Details of taxable supplies and being in business here

Given that every EC Member State has differing rules to the UK, it is crucial to check all the consequences of letting property overseas.

A final word of warning; I quite often hear the comment “I’m not going to bother – how will they ever find out?”

If an overseas property owner based in the UK is in competition with local letting businesses, those businesses generally do not have any compulsion in notifying the authorities. In addition, I have heard of authorities carrying out very simple initiatives to see if owners are VAT registered. In many resorts, income from tourism is vital and this is a very important revenue stream for them so it is well policed.

Please contact us for further details. We have experience in dealing with overseas VAT matters on our clients’ behalf.

Monthly VAT Round-Up

By Marcus Ward 29 January 2016

We produce a free monthly email update on all VAT things great and small. It covers events for the last month and flags up significant changes as a result of changes to legislation, HMRC announcements and case law. It also looks at specific VAT issues that may affect a business.

Please contact us you would like to subscribe.

marcus.ward@consultant.com

07748 117935

Twitter: @mw_vat

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VAT – Zero rating of charitable building; latest from the courts

By Marcus Ward 25 January 2016

A recent case at the Upper Tribunal (UT): Wakefield College here considered whether certain use of the property disqualified it from zero rating.

Background

In order to qualify for zero rating a building it has to be used for “relevant charitable purpose”

This means that it is used otherwise than in the course or furtherance of a business. In broad terms, where a charity has a building constructed which it can show it will use for wholly non business purposes then the construction work will be zero rated by the contractor. This is the case even if there is a small amount of business activity in the building as long as these can be shown to be insignificant (which is taken to be less than 5% of the activities in the whole building) This so called de-minimis of 5% can be of use to a charity. In order for zero rating to apply the charity must issue a certificate to the builder stating the building will be used for non-business purposes.

Although the UT supported HMRC’s appeal against the F-tT decision there was an interesting comment made by the UT. The fact that students paid towards the cost of their courses (albeit subsidised) meant that business supplies were made, and the quantum of these fees exceeded the 5% de minimis meant that the construction works were standard rated. This decision was hardly surprising, however, a comment made by the Tribunal chairman The Honourable Mr Justice Barling Judge Colin Bishopp may provide hope for charities in a similar position to the appellant: he stated that it believed that the relevant legislation should be reconsidered, suggesting that;

“… it cannot be impossible to relieve charities of an unintended tax burden while at the same time protecting commercial organisations from unfair competition and preventing abuse …”.

In my view, it is worth considering the summing up in its entirety as it helpfully summarises the current position and provides some much sought after common sense in this matter:

“We cannot leave this appeal without expressing some disquiet that it should have reached us at all. It is common ground that the College is a charity, and that the bulk of its income is derived from public funds. Because that public funding does not cover all of its costs it is compelled to seek income from other sources; but its doing so does not alter the fact that it remains a charity providing education for young people. If, by careful management or good fortune, it can earn its further income in one way rather than another, or can keep the extent of the income earned in particular ways below an arbitrary threshold, it can escape a tax burden on the construction of a building intended for its charitable purpose, but if it is unable to do so, even to a trivial extent, it is compelled to suffer not some but all of that tax burden. We think it unlikely that Parliament intended such a capricious system. We consider it unlikely, too, that Parliament would consider it a sensible use of public money for the parties to litigate this dispute twice before the FTT and now twice before this tribunal. We do not blame the parties; the College is obliged to maximise the resources available to it for the pursuit of its charitable activities, just as HMRC are obliged to collect tax which is due. Rather, we think the legislation should be reconsidered. It cannot be impossible to relieve 16 charities of an unintended tax burden while at the same time protecting commercial organisations from unfair competition and preventing abuse”.

Action

If any charities, or charity clients have been denied zero rating on a building project, it will be worthwhile monitoring this development. Please contact us if you require further information.

VAT legislation – relationship between EU and UK law. A guide

By Marcus Ward 22 January 2016

As most people will know, UK domestic VAT law is derived from EU legislation, but what is the actual relationship?

It is important to understand how both elements of legislation work in cases of dispute with HMRC as it often provides additional ammunition.

History

Most Member States already had a system of VAT before joining the EU but for some countries VAT had to be introduced together with membership of the EU. When the UK joined the EU in 1972 it replaced two taxes; purchase tax and selective employment tax with VAT.

In 1977, the Council of the European Communities sought to harmonise the national VAT systems of its Member States by issuing the Sixth Directive to provide a uniform basis of assessment and replacing the Second Directive promulgated in 1967.

Council Directive 2006/112/EC (the VAT Directive) sets out the infrastructure for a common VAT system which each Member State is required to implement by means of its own domestic legislation. This important Directive codifies into one piece of legislation all the amendments to the original Sixth Directive, thus clarifying EU VAT legislation currently in force.

Intention

The aim of the VAT Directive is to harmonise the indirect tax within the EU, and it specifies that VAT rates must be within a certain range. The basic aims are:

Harmonisation of VAT law
Harmonisation of content and layout of the VAT declaration
Regulation of; accounting, providing a common legal accounting framework
Common framework for detailed description of invoices and receipts
Regulation of accounts payable
Regulation of accounts receivable
Standard definition of national accountancy and administrative terms

EU Statements

There are four types of EU statements:

Regulations – Are binding in their entirety and have general effect to all EU Member States. They are directly applicable in the UK legal system.
Directives – Are binding as to result and their general effect is specific to named EU countries. The form and methods of compliance are left to the addressees.
Decisions – Are binding in their entirety and are specific to an EU country, commercial enterprise or private individual.
Recommendations and Opinions – Are not binding and are directed to specific subjects on which the Council’s or Commission’s advice has been sought.

EU Legislation as part of UK Legislation

EU law is made effective for UK legislation via European Communities Act 1972 section 2. The effects of EU law as regards UK VAT legislation is summarised as follows.

Direct effect

The Court of Justice has held “wherever the provisions of a directive appear … to be unconditional and sufficiently precise, those provisions may … be relied upon as against any national provision which is incompatible with the directive insofar as the provisions define rights which individuals are able to assert against the state” (Case: Becker). Also in UFD Ltd it was stated that “in all appeals involving issues of liability, the Tribunal should consider the relevant provisions of the Council directives to ensure that the provisions of the UK legislation are consistent therewith”.

Primacy of EU Directives over UK legislation

A UK court which is to apply provisions of EU law is under a duty to give full effect to those provisions, if necessary refusing of its own motion to apply any conflicting provision of national legislation.

Interpretation of UK law

If UK VAT legislation is unclear or ambiguous, Tribunals are “entitled to have regard to the provisions of the relevant EU Directive in order to assist in resolving any ambiguity in the construction of the provisions under consideration’ (Case: English-Speaking Union of the Commonwealth).

Legal principles

In implementing the common VAT structure, domestic legislation is required to recognise certain legal principles.

Examples of some of these are the principle of:

Equality of citizens
Subsidiarity and proportionality
Non-discrimination on grounds of nationality
Fiscal neutrality
Legal certainty and the protection of legitimate expectations.

Practical application for most taxpayers

Practically, a result of the above is that taxpayers are regularly able to recover VAT (plus interest) paid to HMRC in error in cases where the UK domestic legislation has not implemented EU law correctly. However, HMRC has no right to recovery where VAT has been under-collected as a result of inappropriate implementation of the EU legislation.

VAT – How To Survive The Enforcement Powers

By Marcus Ward 19 January 2016

Penalties for VAT infringements are draconian and there is still an alarming array of enforcement powers to trap the unwary. By being conscious of the problem areas and planning carefully, it should be possible to avoid becoming an unwitting victim of the system. This article focuses mainly on VAT compliance.

Late Registration

You must notify HMRC if your turnover exceeds £82,000 in twelve months, or if you believe it will exceed £82,000 in the next thirty days. The penalty for failing to notify liability falls within the single penalty system and it could be up to 100% of the VAT due. There is no penalty if the taxpayer has a reasonable excuse for not registering at the correct time.

After Registration

Every VAT registered business needs to ensure that it is organised to deal with VAT correctly and on time:

Is there someone in your business who controls VAT accounting and ensures that new products etc. are properly dealt with for VAT purposes?
Do your business systems ensure that all output tax and input tax are properly recorded?
Are systems in force to ensure that proper evidence is obtained to support VAT input tax claims?
Where VAT is not charged on supplies made, is this correct in law and is proper evidence retained?
Are there systems in force to ensure that non‐deductible input tax is not reclaimed, e.g. most VAT on motor cars, or business entertaining?
Is VAT always considered before contracts are made?

Default surcharge

A default occurs if HMRC has not received your return and all the VAT due by the due date. The relevant date is the date that cleared funds reach HMRC’s bank account. If the due date is not a working day, payment must be received on the last preceding working day. .

Consequence of default

You receive a warning after the first default ‐ the Surcharge Liability Notice (SLN). Do not ignore this notice. If you fail to pay the VAT due on the due date within the next five quarters, the surcharge will be 2% of the outstanding tax. The surcharge increases to 5% for the next default, and then by 5% increments to a maximum of 15%. Each default, whether it is late submission of the return or late payment, extends the surcharge liability period, but only late payment incurs a surcharge.

Errors on returns and claims

Incorrect returns incur a penalty under the following penalties apply:

An error, when reasonable care not taken: 30%;
An error which is deliberate, but not concealed: 70%;
An error, which is deliberate and concealed: 100%.

If a taxpayer takes ‘reasonable care,’ then no penalty is due.

VAT Flat Rate Scheme (FRS)– New judgement on retrospective application

By Marcus Ward 14 January 2016

Latest from the courts

In the recent case of KDT Management Ltd an appeal against a decision by HMRC not to allow the appellant to retrospectively apply the percentage of turnover it says was appropriate to its business under the FRS instead of the one it says it mistakenly chose was considered.

HMRC issued an assessment to recover VAT which was alleged to have been omitted from the appellant’s returns because it did not apply certain increases of rate to its turnover under the FRS of accounting for VAT.

It was also an appeal against a decision by HMRC not to allow the appellant to retrospectively apply the percentage of turnover it says was appropriate to its business under the FRS instead of the one it says it mistakenly chose.

The decision was that the appeal against the assessments to VAT and interest were upheld. The appeal against the decision not to backdate was also upheld and the decision was cancelled.

Please contact us if you have been in dispute over the rate applicable on a FRS, or if you think you may be using an inappropriate percentage. This is likely to mainly affect small businesses.

Details of the FRS here

Small business: Should I register for VAT voluntarily?

By Marcus Ward 12 January 2016

OK, so why would a business choose to VAT register when it need not (let’s say it’s turnover is under the VAT registration limit of £82,000)? Isn’t it best just to avoid the VATman if at all possible?

This is not an article which considers whether a business MUST register, but rather it looks at whether it is a good idea to register on a voluntary basis if it is not compulsory.

As a general rule of thumb; if you sell to the public (B2C) then probably not. If you sell to other VAT registered businesses (B2B) then it is more likely to be beneficial.

If you sell B2B to customers overseas it is almost certain that VAT registration would be a good thing, as it would if you supply zero rated goods or services in the UK. This is because there is no output tax on sales, but full input tax recovery on costs; VAT nirvana! A distinction must be made between zero rated supplies and exempt supplies. If only exempt supplies are made, a business cannot register for VAT.

Apart from the economic considerations, we have found that small businesses are sometimes put off VAT registration by the added compliance costs and the potential penalties being in the VAT club can bring. Weighed against this, there is a certain kudos or prestige for a business and it does convey a degree of seriousness of a business undertaking. It may also make life simpler (and reduce costs) if a business buys goods or services from other EC Member States. We also come across situations where a customer will only deal with suppliers who are VAT registered.

The key to registration is that, once registered, a business may recover the VAT it incurs on its expenditure (called input tax). So let us look at some simple examples of existing businesses for comparison:

Example 1

A business sells office furniture to other VAT registered business (B2B).

It buys stock for 10,000 plus VAT of 2,000

It incurs VAT on overheads (rent, IT, telephones, light and heat etc) of 2,000 plus 400 VAT

It makes sales of 20,000.

If not registered, its profit is 20,000 less 12,000 less 2400 = 5600

If VAT registered, the customer can recover any VAT charged, so VAT is not a disincentive to him.

Sales 20,000 plus 4000 VAT (paid to HMRC)

Input tax claimed = 2400 (offset against payment to HMRC)

Result: the VAT is neutral and not a cost, so profit is 20,000 less 12,000 = 8000, a saving of 2400 as compared to the business not being registered. The 2400 clearly equals the input tax recovered on expenditure.

Example 2

A “one-man band consultant” provides advice B2B and uses his home as his office. All of his clients are able to recover any VAT charged.

He has very little overheads that bear VAT as most of his expenditure is VAT free (staff, train fares, use of home) so his input tax amounts to 100.

He must weigh up the cost (time/admin etc) of VAT registration against reclaiming the 100 of input tax. In this case it would probably not be worthwhile VAT registering (although the Flat Rate Scheme may be attractive, please see article here

Example 3

A retailer sells adult clothes to the public from a shop. She pays VAT on the rent and on the purchase of stock as well as the usual overheads. The total amount she pays is 20,000 with VAT of 4000.

Her sales total 50,000.

If not VAT registered her profit is 50,000 less 24,000 = 26,000

If VAT registered she will treat the value of sales as VAT inclusive, so of the 50,000 income 8333 represents VAT she must pay to HMRC. She is able to offset her input tax of 4000.

This means that her profit if VAT registered is 50,000 less the VAT of 8333 = 41,667 less the net costs of 20,000 = 21,667.

Result: a loss of 4333 in profit.

As may be seen, if a business sells to the public it is nearly always disadvantageous to be voluntarily VAT registered. It may be possible to increase her prices by circa 20%, but for a lot of retailers, this is unrealistic.

Intending traders

If a business has not started trading, but is incurring input tax on costs, it is possible to VAT register even though it has not made any taxable supplies. This is known by HMRC as an intending trader registration. A business will need to provide evidence of the intention to trade and this is sometimes a stumbling block, especially in the area of land and property. Choosing to register before trading may avoid losing input tax due to the time limits (very generally a business can go back six months for services and four years for goods on hand to recover the VAT). Also cashflow will be improved if input tax is recovered as soon as possible.

Action

Careful consideration should be given to the VAT status of a small or start-up business. This may be particularly relevant to start-ups as they typically incur more costs as the business begins and the recovery of the VAT on these costs may be important.

This is a basic guide and there are many various situations that require further consideration of the benefits of voluntary VAT registration. We would, of course, be pleased to help.

UK VAT Registration For Overseas Businesses – A Guide

By Marcus Ward 5 January 2016

When must an overseas business register for VAT in the UK?

This question is increasingly being asked by overseas entities which do business in the UK. So what are the requirements, and what choices are there?

Compliance

An overseas business must VAT register in the UK if:

• it makes any taxable supplies of goods and services in the UK in the course of furtherance of his business. These supplies could be of any description, but commonly are the sale of goods which are physically located in the UK and the operation of certain events that take place in the UK.

• the business is registered for VAT in another EC country, and it sells and delivers goods in the UK to customers who are not VAT-registered;so-called ‘distance sales’ (details here) and the value of those distance sales exceeds the relevant threshold (currently £70,000).

• it acquires goods in the UK directly from a VAT-registered supplier in another EC country and the total value of the acquisitions exceeds the acquisitions threshold.

• it makes a claim under the EC 8th Directive or EC 13th Directive and subsequently supplies the relevant goods in the UK.

If these tests are met, a supply is made in the UK. It does not matter in which country where the business “belongs” or where it’s staff or technical resources are located. A guide to the place of belonging here.

For VAT purposes, the UK includes the territorial sea of the UK (ie waters within twelve nautical miles of the coastline).

There is no need to register if the only UK supplies are those on which the customer is liable to account for any VAT due under the ‘reverse charge’ procedure.

An overseas trader may also be registered if:

• he has started in business but is not yet making taxable supplies, provided he can show the intention of making taxable supplies in the future as part of his business; or

• his turnover is below the threshold, provided he can prove to HMRC that he is carrying on a business for VAT purposes and making taxable supplies.

Consequences of registration

An overseas business which is registered or required to be registered for VAT in the UK must account for VAT in respect of those supplies and acquisitions taking place in the UK. It is also liable to VAT on imports of any goods into the UK and on the acquisition in the UK of excisable goods or of new means of transport from another EC country. It also usually means that any VAT incurred in the UK may be recovered as input tax. This is particularly relevant if import VAT is incurred on importing goods into the UK.

Registration options available

An overseas trader who is not normally resident in the UK, does not have a UK establishment and, in the case of a company, is not incorporated here, and which is required or entitled to be registered in the UK can normally choose between three registration options:

(1) It may appoint a VAT representative who will be jointly and severally liable for any VAT debts. The overseas trader must still complete a VAT registration form. In addition to this, both the overseas trader and the VAT representative must complete a Form VAT 1TR. It is understood that, in practice, very few businesses are prepared to provide the services of a VAT representative because they are unwilling to become liable for any VAT debts of the overseas trader.

(2) It may appoint an agent to deal with the VAT affairs. The agent cannot be held responsible to HMRC for any VAT debts and HMRC reserve the right not to deal with any particular agent. (In some cases, HMRC could insist that a tax representative is appointed although this cannot now be done where the overseas trader is based in a country where certain mutual assistance arrangements exist.) The overseas trader must still complete a VAT registration form. In addition, HMRC will need a letter of authority. A suggested letter of authority approved by HMRC is:

(Insert principal’s name) of (insert principal’s address) hereby appoints (insert name of UK agent or employee) of (insert address of UK agent or employee) to act as agent for the purpose of dealing with all their legal obligations in respect of Value Added Tax.

This letter authorises the above-named agent to sign VAT return forms 100 and any other document needed for the purpose of enabling the agent or employee to comply with the VAT obligations of the principal.

Signed (insert principal’s signature)

Date (insert date)

(3) It may deal with all the VAT obligations (including registration, returns and record-keeping) itself. To register, the overseas business should contact the Aberdeen VAT office at Ruby House, 8 Ruby Place, Aberdeen, AB10 1ZP (Tel: 01224 404807/818). This is known as a Non-Established Taxable Person (NETP) registration.

Summary

There can be confusion around this matter, not only from a technical aspect, but with an overseas business’ unfamiliarity with the UK authority’s requirements and also possibly language and communication problems. Additionally, the practical aspects of identifying the need to VAT register in the UK and the completion of forms etc can delay matters. Of course, just like any other VAT registration, there are penalties for not registering, or not registering at the appropriate time. There is also the reluctance of certain overseas businesses to deal with UK VAT at all. Unfortunately, a head in the sand attitude just stores up problems for the future. We have been called on to firefight on this topic a number of times, and it rarely ends well.

VAT – Building your new home. Claiming VAT on costs

By Marcus Ward 14 December 2015

Building your own home is becoming increasingly popular. There are many things to think about, and budgeting is one of the most important.

The recovery of VAT on the project has a huge impact on the budget and care must be taken to ensure that a claim is made properly and within the time limits. You don’t have to be VAT registered to make a claim, this is done via a mechanism known as The DIY Housebuilders’ Scheme. It has specific rules which must be adhered to otherwise the claim will be rejected.

If you buy a new house from a property developer, you will not be charged VAT. This is because the sale of the house to you will be zero-rated. This allows the developer to reclaim the VAT paid on building materials from HMRC. However, if you build a house yourself, you will not be able to benefit from the zero-rating. The DIY Housebuilder’ Scheme puts you in a similar position to a person who buys a zero-rated house built by a property developer.

Who can make a claim?

You can apply for a VAT refund on building materials and services if you are:

building a new home in which you will live
converting a building into a home
building a non-profit communal residence, eg; a hospice
building a property for a charity.

Eligibility

New homes

The house must:

be separate and self-contained (eg; not an extension)
be for you or your family to live or holiday in (not for sale when complete)
not be for business purposes (you can use one room as a work from home office)
not be prevented from sale independently to another building by planning permission or similar (eg; a granny annexe).

A claim may also be made for garages built at the same time as the house and to be used with the house.

Contractors working on new residential buildings should zero rate their supplies to you, so you won’t pay any VAT on these.

Conversions

The building being converted must usually be a non-residential building (eg; a barn conversion). Residential also buildings qualify if they haven’t been lived in for at least 10 years.

You may claim a refund for builders’ work on a conversion of non-residential building into home. These supplies will be charged at the reduced rate of 5% for conversion works. If the standard rate of 20% s charged incorrectly, you will not be able to claim the standard rated amount. Care should be taken that the contractor understands the VAT rules for conversions as these can be complex.

Communal and charity buildings

You may get a VAT refund if the building is for one of the following purposes:

non-business – you can’t charge a fee for the use of the building
charitable, eg; a hospice
residential, eg; a children’s home

What can you claim on?

Building materials

You may claim a VAT refund for building materials that are incorporated into the building and can’t be removed without tools or damaging the building.

What doesn’t qualify

You cannot claim for:

building projects outside the UK
materials or services that don’t have any VAT, eg; were zero-rated or exempt
professional or supervisory fees, eg architects and surveyors
the hire of plant, tools and equipment, eg; generators, scaffolding and skips
building materials that aren’t permanently attached to or part of the building itself
some fitted furniture, electrical and gas appliances, carpets or garden ornaments
supplies for which you do not have a VAT invoice

Examples of items you can, and cannot claim for are listed below.

How to claim

To claim a VAT refund, send form 431NB or 431C to HMRC

Local Compliance National DIY Team
SO987
Newcastle
NE98 1ZZ

What you need to know

You must claim within 3 months of the building work being completed.

You will usually get the refund in 30 working days of sending the claim.

You must include the following with your claim:

bank details
planning permission
proof the building work is finished – eg a letter from your local authority
a full set of building plans
invoices – including tenders or estimations if the invoice isn’t itemised
bills and any credit notes

VAT invoices must be valid and show the correct rate of VAT or they will not be accepted in the claim.

HMRC usually examine every claim closely and often query them, so it pays to ensure that the claim is as accurate as possible first time. We find a review by us before submission ensures the maximum amount is claimed and delays are avoided.

Payments made after completion of the house cannot be claimed, and only one claim can be made for the whole project, so cashflow may be an issue.

Examples of items that you can claim for

The items listed below are accepted as being ‘ordinarily’ incorporated in a building (or its site). This is not a complete list.

Air conditioning
Building materials that make up the fabric of the property (for example, bricks, cement, tiles, timber, etc)
Burglar and fire alarms
Curtain poles and rails
Fireplaces and surrounds
Fitted kitchen furniture, sinks, and work surfaces
Flooring materials (other than carpets and carpet tiles)
Some gas and electrical appliances when wired-in or plumbed-in
Heating and ventilation systems including solar panels
Light fittings (including chandeliers and outside lights)
Plumbing materials, including electric showers, ‘in line’ water softeners and sanitary ware
Saunas
Turf, plants, trees (to the extent that they are detailed on scheme approved by a Planning Permission) and fencing permanently erected around the boundary of the dwelling
TV aerials and satellite dishes

Examples of items that you cannot claim for

This is not a complete list.

- Aga/range cookers (Unless they are solid fuel, oil-fired or designed to heat space or water. Note: not all cookers are ‘space heaters’ because they incidentally radiate heat while operating. To be classified as such they must be fitted to a heating module or boiler)

- Free-standing and integrated appliances such as: cookers, fridges, freezers, dishwashers, microwaves, washing machines, dryers, coffee machines

- Audio equipment (including remote controls), built-in speakers, intelligent lighting systems, satellite boxes, Freeview boxes, CCTV, telephones

- Consumables (for example, sandpaper, white spirit)

- Electrical components for garage doors and gates (including remote controls)

- Bedroom furniture (unless they are basic wardrobes) bathroom furniture (for example, vanity units and free-standing units)

- Curtains, blinds (unless they are integral, that is, blinds inside sealed double-glazed window units),

- Carpets

Garden furniture and ornaments and sheds.

Please contact us if you require assistance with a DIY Housebuild project.

VAT – The Default Surcharge. What is it, is it fair and will the regime change?

By Marcus Ward 1 December 2015

What is the Default Surcharge?

Default Surcharge is a civil penalty to encourage businesses to submit their VAT returns and pay the tax due on time.

When will a Default Surcharge be issued?

A business is in default if it sends in its VAT return and or the VAT due late. No surcharge is issued the first time a business is late but a warning (a Surcharge Liability Notice) is issued. Subsequent defaults within the following twelve months (the “surcharge period”) may result in a surcharge assessment. Each time that a default occurs the surcharge period will be extended. There is no liability to a surcharge if a nil or repayment return is submitted late, or the VAT due is paid on time but the return is submitted late (although a default is still recorded).

How much is the surcharge?

The surcharge is calculated as a percentage of the VAT that is unpaid at the due date. If no return is submitted the amount of VAT due will be assessed and the surcharge based on that amount. The rate is set at 2 per cent for the first default following the Surcharge Liability Notice, and rises to 5 per cent, 10 per cent and 15 per cent for subsequent defaults within the surcharge period. A surcharge assessment is not issued at the 2 per cent and 5 per cent rates if it is calculated at less than £200 but a default is still recorded and the surcharge period extended. At the 10 per cent and 15 per cent the surcharge will be the greater of the calculated amount or £30.

Specific issues

The default surcharge can be particularly swingeing for a fast growing company. Let’s say that a small company grows quickly. In the early days the administration was rather haphazard, as is often the case, and a number of returns and payments were submitted late. Fast forward and the turnover, and the VAT payable, has grown significantly. Being late at this time means that the amount of default surcharge is considerably higher than when the original default which created the surcharge took place. This leads us onto whether the surcharge is proportionate.

A business with cashflow difficulties may well ask whether it should be penalised by HMRC for having those difficulties; which of course will add to the problem.

Proportionality

The existing, long-standing default surcharge regime has always had issues with the principle of proportionality. The regime has regularly been challenged in the Courts.

Is it proportionate that a same penalty is applied for a payment which is one day late and one which is one year late? This is a matter which has concerned both HMRC and the Courts for a number of years.

In the Upper Tribunal case of Total Technology (Engineering) Ltd the Judge concluded that it was possible for an individual surcharge to be disproportionate, but that the system as a whole was not fundamentally flawed. It is also worth noting that in In Equoland judgment the judge stated that a penalty which is automatic and does not take into account the circumstances is at the least tending towards being disproportionate. The default surcharge is automatic and it is one of the few penalties that cannot be mitigated in any circumstances.

Defence against a surcharge

In order to have a surcharge withdrawn it is necessary to demonstrate that a business had a reasonable excuse for the default.

This is a subject of an article on its own. Certain factors, like relaying on a third party are not accepted as a reasonable excuse. HMRC state that a business will not be in default if they, or the independent tribunal, agree that there is a reasonable excuse for failing to submit a VAT Return and/or payment on time.

There is no legal definition of reasonable excuse but HMRC will look closely at the circumstances that led to the default.

If the circumstance that led to the default were unforeseen and inescapable and a business is able to show that its conduct was that of a conscientious person who accepted the need to comply with VAT requirements, then it may amount to a reasonable excuse.

What sort of circumstances might count as reasonable excuse?

HMRC provide guidelines on circumstances where there might be a reasonable excuse for failing to submit a VAT Return and/or payment on time. These include:

computer breakdown
illness
loss of key personnel
unexpected cash crisis – where funds are unavailable to pay your tax due following the sudden reduction or withdrawal of overdraft facilities, sudden non-payment by a normally reliable customer, insolvency of a large customer, fraud or burglary. A simple lack of money is unlikely to be accepted as a reasonable excuse.
loss of records

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A recent discussion document sought views from businesses and individuals on potential improvements to how HMRC applies penalties (including the default surcharge) for failing to pay what is owed or to meet deadlines for returns or registration.

HMRC is considering whether and how it should differentiate between those who deliberately and persistently fail to meet administrative deadlines or to pay what they should on time, and those who make occasional and genuine errors for which other responses might be more appropriate.

In the document HMRC highlight two issues with the current VAT default surcharge regime. The first is the concern that while the absence of penalty for the initial offence in a 12 month period gives business the chance to get processes right, some customers simply ignore this warning.

The second concern is the issue of proportionality which fails to distinguish between payments that are one or two days late or many months late.

In my view, it is likely that in the near future we will hear proposals for the system being amended. I think we may anticipate the introduction of mitigation and suspension.